BACKGROUND: In May, the U.S. House of Representatives passed the "Federal Price Gouging Prevention Act" (H.R. 1252), which would make it illegal for gasoline providers to sell their product at "unconscionably excessive" prices when the President declares an "energy emergency." According to the Act's primary sponsor, Rep. Bart Stupak (D-MI), the bill is designed to protect Americans from being "forced to pay too much at the gas pump."1

On June 21, the Senate passed a similar provision designed to outlaw gasoline "price gouging" in a comprehensive energy bill, H.R. 6. Under this bill, an "energy emergency" could be declared by the President for any region of the country where gasoline is either in short supply or projected to be in short supply.

Both the House and Senate bills direct the Federal Trade Commission to enforce the proposed price-gouging edict. Gasoline wholesalers and retailers who violate the new law would be subject to both civil and criminal penalties that include multimillion-dollar fines and imprisonment.

While this recent proposal from Congress may appeal emotionally to some when gas prices spike, history shows it could actually cause pain at the pump for consumers.

TEN SECOND RESPONSE: Price gouging proposals are de facto price controls that would lead to 1970s-style gasoline shortages and long gas lines.

THIRTY SECOND RESPONSE: Rising gasoline prices during times of short supply are the result of market principles at work. Allowing gasoline prices to adjust naturally to supply conditions ensures that gas is distributed to consumers who need it most. Government-imposed price controls only exacerbate and prolong supply shortages.

DISCUSSION: According to the FTC, "price gouging" laws are not only unnecessary, they are counterproductive. After Hurricanes Katrina and Rita caused gasoline supply shortages in 2005 (shortages that could have triggered an "energy emergency" declaration under the current proposals in Congress), the FTC conducted a study that "found no instances of illegal market manipulation that led to higher prices."2

In fact, higher gasoline prices in the aftermath of Hurricanes Katrina and Rita helped solve supply shortages by sending market signals that resulted in "shipment of substantial additional supplies of gasoline to the United States."3

Should price gouging legislation force gas prices lower than what the market would naturally dictate during a supply shortage, the FTC warns, "wholesalers and retailers will run out of gasoline and consumers will be worse off."4

Congress appears poised to direct the FTC to enforce a law that the agency has determined to be unwise. As the FTC states:

[F]ederal gasoline price gouging legislation, in addition to being difficult to enforce, could cause more problems for consumers than it solves, and that competitive market forces should be allowed to determine the price of gasoline drivers pay at the pump.5

Specifically, the FTC analyzed existing state laws that define price gouging as "unconscionably excessive" and found that such vague terminology "may require subjective interpretation that increases the difficulty of both compliance and enforcement."6

"Given the uncertainty about what constitutes an unconscionable, excessive, or exorbitant price," the FTC reports, "statutes based on any of these terms are likely to be difficult to enforce."7

If the market response to oil and gasoline shortages wrought by the 2005 hurricanes is a blueprint for success, price controls, like those imposed by the federal government during the 1970s, are a recipe for failure. Jack Rafuse, who served as an energy advisor to President Richard Nixon, explains:

For those with memories shorter than mine, President Richard M. Nixon imposed wage and price controls on Aug. 15, 1971. Oil and gas were two of many commodities affected...

Nixon kept the wage-and-price controls on oil, gasoline and petroleum products in place, as did Presidents Gerald Ford and Jimmy Carter. The results were disastrous. Oil exploration and domestic oil production slowed sharply...

Thanks to this misguided policy, gasoline lines snaked along highways for hours during oil crises in the mid- and late-1970s. Stations ran out of gasoline and laws told consumers which days they could purchase gas. A windfall-profits tax compounded all the negative effects, and the shortages lasted until President Ronald Reagan repealed controls in 1981. The price of a gallon of gas at the pump fell by a third over five years.

With this kind of record, you might wonder what Congress is doing considering price controls and windfall profits taxes on gasoline...

After Katrina, while the market encouraged everyone to cut back, there were no 1970s-style gas lines or closed stations elsewhere in the nation.

Other producers - domestic and international - were motivated by higher prices to take up the slack. In fact, oil exploration drilling is at a 20-year high and expenditures are at an all-time high. That's how markets work.8

WHAT OTHERS ARE SAYING:

John Stossel, Consumer Advocate and Bestselling Author:

Even if gasoline prices set no record, Congress surely set a record for inanity. What else are we to say about an anti-"gouging" bill [H.R. 1252] passed last month by the House that would make it a crime to charge "unconscionably excessive" prices?

...Please. Lawyers will get rich debating vague words like those. Laws are supposed to be clear so we'll know in advance what's legal and what's not. But there's nothing clear about those "crimes."

...If the politicians do enforce anti-"gouging" rules, it will be akin to capping prices, and we tried that before. It was a disaster. Drivers had to wait in long lines, and some couldn't get any gasoline. Only when price controls were lifted did supplies rush in, and only then did prices go back down.9

Andrew Morriss, Senior Fellow, Institute for Energy Research:

[W]ith its "price gouging" provisions, the Senate bill [H.R. 6] includes some of the worst pricing legislation since the 1970s disastrous energy price-and-allocation controls. As anyone who experienced the gas lines and shortages of those days knows, letting politicians meddle with prices is a recipe for disaster.

No one likes high gas prices, but they are needed when shortages cause prices to go up, so consumers conserve and entrepreneurs find ways to increase supply. When people can't use prices and markets, they use something else to decide who gets gasoline instead: valuable time. Wasting time and fuel in queues is an unintended consequence of political interference in markets, a good reason to make sure this provision does not become law.10

Second, gouging - as it is commonly understood - is just the efficient working of the price system. Interfere with high prices, and you do more harm than good.11

Mark J. Perry, Professor of Economics and Finance, Flint Campus of the University of Michigan:

"Price gouging" provisions in the energy legislation (H.R. 1252 and H.R. 6) could have a chilling effect on the oil market. The severe civil and criminal penalties - substantial fines and possible jail time - would force everyone in the oil industry, from the biggest refiner to the smallest gas station, to reconsider everyday business decisions, including whether they should remain open, particularly in disaster areas.

Gasoline suppliers and wholesalers may choose not to move any additional supplies into affected areas when doing so exposes them to possible fines and jail time if the government finds them guilty of the ambiguous crime of "unconscionable pricing."

In that case, consumers certainly won't be better off when they face artificial, government-created shortages of gasoline after future natural disasters.12

Bernard L. Weinstein, Professor of Applied Economics and Director of the Center for Economic Development and Research at the University of North Texas in Denton:

According to John H. Seesel, associate general counsel for energy at the FTC, "It's difficult to understand precisely what price gouging is."

But in Congress, price gouging is a term embraced by some members to pass the buck and blame the oil industry for high prices rather than their own shortsightedness and unwillingness to construct a comprehensive energy policy for the United States.13

Richard W. Rahn, Chairman, Institute for Global Economic Growth:

Mark Twain quipped, "America's only native criminal class is Congress." Once again last week, Congress proved Twain right when they passed a bill [H.R. 1252] to forbid gasoline "price gouging" without, of course, bothering to precisely define the term, other than to say raising "prices unreasonably."

...Prices normally rise when demand increases faster than supply, which is exactly what is happening with gasoline. The gasoline price depends on the global price of the raw material - petroleum - and the availability and costs of refining it into gasoline. The current price spike is due to the lack of refining capacity...

Now ask yourself: Would you invest in the gasoline refinery business, knowing: Congress mandated the domestic supply of oil will continue to decline because it has prohibited production where the big new fields are, namely the North Slope of Alaska (ANWR) and off the coastlines of much of the country. Further, Congress, state and local political authorities have made it almost impossible to build new, economically competitive refineries because of excessive environmental and other restrictions. Congress has decided to subsidize competing fuels, such as ethanol, thus putting your product - gasoline - at a further disadvantage. And when the market cycle occasionally allows you to charge a high enough price to recoup your multibillion-dollar investment, Congress imposes implicit price controls and threatens you with jail if you charge the market price.14

5 Charli E. Coon, J.D., “Why the Government's CAFE Standards for Fuel Efficiency Should Be Repealed, not Increased,” Backgrounder #1458, July 11, 2001, available online at http://www.heritage.org/Research/EnergyandEnvironment/BG1458.cfm as of June 19, 2007.